The Hangover Economy: The Aftermath of Quantitative Easing

After behemoth Wall Street institutions faltered and the economy fell off a cliff during the financial crisis nearly eight years ago, bailouts and Quantitative Easing (QE) followed.

Political talking points aside, most agree that experimental monetary policy has created a very uncertain world, one that many say would likely be worse without non-traditional stimulative tools like QE. It hasn’t exactly been an easy ride economically, as QE has produced major distortions in the economy that some say put us at risk of making the same mistakes all over again. Welcome to the hangover economy, where we’re getting drunk again on debt so we don’t feel serious pain.

You read that right: there’s chatter that we might be traversing the same path of doom that led to a long and painful recession. The last crisis was fueled by a real-estate frenzy, and a mortgage market that didn’t price in the possibility that property prices would ever decline. Today, QE is distorting markets once again, in a way that may undermine future economic stability.

“The main distortions that we see today from QE are the mispricing of risk across markets and the loaning of money to borrowers who might not be credit-worthy,” said Desmond Lachland, a scholar at the American Enterprise Institute who previously worked at the International Monetary Fund. The mispricing of risk and lending money to people who probably can’t afford to square up their debts sounds eerily similar to the events that led to the last financial crisis.

Abroad, American QE has distorted entire economies, causing great booms and debilitating busts. After the Federal Reserve instituted QE, many developing countries were inundated with investment from investors in the United States looking for a better return.

“QE has spawned massive capital flows to emerging market economies,” Lachland said. Eventually, the boom in emerging markets came to a grinding halt, and inflows quickly became outflows. Today, countries like Brazil are mired in recession following a spectacular bust in international commodity prices.

Back here in America, lending is loosening up while the recovery is starting to look quite old (seven years and counting). The economy has been growing ever so slowly since the recession ended in June 2009, averaging a hair over 2 percent. This is much slower growth than what we saw as recently as the 1990s. The lack of a meaningful recovery has given opponents of QE a platform from which they can critique the Fed’s recent history.

Nevetheless, it might have been much worse without QE. Overall, QE has mixed reviews in the policy community. The Economist has written that “the jury is still out on QE,” and people don’t really understand the long-term effects. Given that the stakes are already being laid out for the next crisis, policymakers are trying to get a grip on what tools they might have at their disposal. Because interest rates are already at rock-bottom levels (they’re slowly rising), many fear the Fed is out of ammo should another crisis catch us off-guard. One idea gaining traction is the idea of “helicopter money.”

“Helicopter money would put dollars in the hands of everyday consumers and possibly avoid many of the pitfalls of QE. This would have the advantage over QE in that it would not distort asset markets and it would not induce large capital flows again to the emerging market economies,” said Lachland. “It would also have the advantage of securing a fairer distribution of the gains by benefiting the average taxpayer rather than by increasing the financial market wealth of those better off.”

We live in a highly experiential world of monetary policy. Ideas that probably would have been laughed at a decade ago are now commonplace policy, like negative interest rates and helicopter money. They’re actually charging people to put money in banks, while governments are seriously mulling printing money and giving it directly to consumers during the next recession. It’s an exciting and terrifying time to be alive, where tomorrow’s economic policies are far from set in stone.

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David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.

Only difference is the bailout will come from the top and get distributed to everyone under a certain income bracket instead of going to businesses and people who do not need it (other than to save their own butt). The markets will just have to adjust and realize their products are not worth any more than they are in the emerging markets. Hard pill swallow, but someone has to take it.